Question

Lohn Corporation is expected to pay the following dividends over the next four years: $12, $9, $8, and $3.50. Afterward, the company pledges to maintain a constant 7 percent growth rate in dividends forever. If the required return on the stock is 14 percent, what is the current share price?

Answer 1

Answer:

The current share price is 56.60

Explanation:

The expected dividend by Lohn Corporation in 1st year, D1 = $12

The expected dividend by Lohn Corporation in 2nd year, D2 = $9

The expected dividend by Lohn Corporation in the third year, D3 = $8

The expected dividend by Lohn Corporation in the fourth year, D4 = $3.50

Given the interest rate = 14%

Now use the present value of all dividends and then add all to find the current share price.

Present value (PV) = Future value / (1+r)^n

r = interest rate  

n = time period  

PV of D1 = 12 / 1.14 = 10.53

PV of D2 = 9 / 1.14^2 = 6.93

PV of D3 = 8 / 1.14^3 = 5.40

PV of D4 = 3.50 / 1.14^4 = 2.07

D5 = 3.50 * 1.07 = 3.745

P4 = D5 / (14%-7%) = 53.5

PV of P4 = 53.5 / 1.14^4 = 31.68

The Stock price = 10.53 + 6.93 + 5.40 + 2.07 + 31.68  

The Stock price = 56.60